The concept of a Center of Excellence is not new to global businesses. The CoE strategy has been utilized over the last few decades for a variety of objectives, primarily to create hubs for knowledge sharing and capability building in areas such as pharmaceuticals, automobile, telecom or for specific functions like innovation, technology, R&D, testing, etc. In the outsourcing industry, its application has been both fast and extensive, and is offering the much-needed flexibility, productivity, cost and resource efficiency to companies in managing their increasingly global businesses.

Excellence centers in the era of Global Sourcing and Multi-Shoring

In the early stages of outsourcing, contracts were either handled within captive centers or given out to isolated third party vendors mandated to deliver cost reduction based on scale and labour arbitrage. With rising maturity, outsourcing has moved to a "value generation" exercise, where buyers are willing to experiment with a variety of operating arrangements (such as captive, third party, shared services, build-operate-transfer, managed build-out, etc). The scope of outsourcing and offshoring has also extended globally as a large number of offshore destinations are now emerging, providing the buyer a range of competitive options.

The early adopters are now setting the ground rules, moving towards a "Center of Excellence" approach, which has several advantages within the new "hybrid" or "global sourcing" framework. Companies choose the optimal location based on their risk-return appetite, taking into consideration factors like manpower availability, domain expertise, country risks and environmental issues.

In 2004, insurance company Aviva initiated a build-operate-transfer (BOT) arrangement with three leading BPO vendors in India with proven expertise in financial services offshoring - 24/7 Customer, WNS Global Services and EXL Service. The three companies worked in partnership to set up, manage, and hand-over in 2007, a Finance and Accounting Center of Excellence (CoE) for Aviva's global insurance business units. The CoE served to centralize resources, standardize processes, share strategic knowledge and more importantly, put in place a roadmap to sustain and develop operational excellence. The choice of locations was strategic - India allowed rapid scalability from an abundant manpower pool (the CoE in India employs close to 8,000 people), while Sri Lanka was chosen for the large number of UK certified accounting professionals.

Most leading vendors today follow a CoE approach, facilitating them to develop and leverage pockets of excellence within the organization, which also tends to find better acceptance among buyers. For instance, Accenture's innovation center is a cluster of CoEs built around key strategic functions like communications, electronics, high tech and media. The services of Infosys are similarly organized around CoEs for testing, technology, R&D, etc. In 2006, Infosys Technologies and Triumph Group, an aerospace systems company, signed a 3-year CoE agreement to utilize Infosys' aerospace engineering services capabilities and manage its engineering resources more effectively.

Going Forward

While the concept itself has found large-scale acceptance, skeptics question the capability of an excellence center to succeed in the absence of broader organizational maturity. Though it sounds like a win-win situation for the client and the vendor, there are several challenges in operating a successful center of excellence, mostly related to implementation and sustainability. Setting up a CoE can be highly cost-intensive and necessitates a comprehensive business plan for the longer term, to transform the CoE from a cost center to a profitable unit.

While these are still early days for CoEs in outsourcing, the concept is likely to witness rapid growth over the next few years. A large number of buyers and suppliers will organize their activities around CoEs to gain from economies of scale and to leverage other strategic advantages.

Industries at higher stages of evolution, such as automobile and electronics have set precedents as they globalized over the last few decades - large corporations sourcing from an evolved structure of specialized manufacturers across the world, each feeding into a larger integrator at the top. Every tier in this hierarchy, often with a very niche expertise, has now developed into a Center of Excellence by itself.

In the outsourcing industry too, services globalization is setting in rapidly, and there is already evidence that the larger vendors are sub-contracting work, acting as "integrators" of services. Whether the industry follows the defined progression of its more mature counterparts, or reaches its unique state of balance is yet to be seen.

The above article is an excerpt from the article by ValueNotes - "Outsourcing Centers of Excellence - The Value Proposition" first published in the magazine "Outsourcing Malaysia".

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